EUR/USD Tests 1.13 Amid Growing Fed-EU Policy Divergence
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The euro continued its rally on Thursday, with the EUR/USD pair testing 1.1300, fueled by a widening monetary policy gap between the European Central Bank (ECB) and the U.S. Federal Reserve. As markets increasingly price in a potential rate cut by the Fed, while the ECB holds firm on its tightening stance, traders are pushing the euro to its highest level since March 2023.
The latest leg of the move came after June’s U.S. inflation data showed a larger-than-expected cooldown, triggering a sharp drop in Treasury yields and dragging the dollar down. Meanwhile, ECB officials reiterated their hawkish outlook, suggesting that another rate hike remains on the table if eurozone core inflation doesn’t ease. ECB President Christine Lagarde recently stated that inflation risks are still tilted to the upside and emphasized the need for policy continuity, giving a further boost to the euro’s momentum.
Interest rate differentials are increasingly favoring the euro. With U.S. markets now betting on a September rate cut, while eurozone rates are expected to remain steady or move slightly higher, capital is shifting back into the eurozone. FX strategists point to this divergence as a key driver behind the euro’s recent strength and suggest that the pair could push above 1.1350 if the trend continues.
Economic data from the eurozone has also supported the rally. Germany’s industrial production rebounded strongly in June, and French services PMI came in above expectations, easing fears of a broader slowdown in Europe. Meanwhile, the Fed’s tone has become increasingly cautious, with several FOMC members calling for patience and suggesting that the inflation battle is close to being won.
Despite the euro’s momentum, some analysts remain cautious, warning that a sharp reversal could occur if U.S. economic data surprises to the upside or if geopolitical risks return to the spotlight. The upcoming release of U.S. PPI and jobless claims data will be closely watched, as stronger-than-expected prints could strengthen the dollar and trigger a pullback in EUR/USD.
Still, market sentiment remains firmly in the euro’s favor for now. The pair has broken through multiple resistance levels and is gaining support from both technical and fundamental indicators. Traders are also watching key speeches from central bankers next week, which could provide more clarity on the direction of transatlantic monetary policy.
As it stands, the euro appears to have regained investor confidence as the macro environment continues to shift. Whether it can hold above the 1.13 level will likely depend on incoming data and how aggressively the Fed moves to change course in the coming weeks.
